Fundamental analysis, end to end

Reading for India · about 6 min

What this cluster is for

Cluster 08 taught you to read a company's financial statements. Cluster 09 taught you the ratios built from them. Both were about reading.

This cluster is about judging. A statement tells you what happened. A ratio tells you the shape of what happened. Neither tells you whether the business is worth owning, whether the accounts describe reality, whether the people running it are running it for you, or whether today's price assumes something that cannot happen.

Those are 4 different questions and they need 4 different kinds of evidence. That is what the 17 lessons here are for.

By the end of this cluster you will be able to:

Pick the right valuation multiple for the kind of business in front of you, and say why the others do not apply
Take today's share price and work out what growth rate the market is already assuming
Judge a bank properly, instead of running a factory's debt ratio over it and reaching a false conclusion
Run the single best fraud screen available to a private investor, in 5 minutes, from free filings
Tell whether a dividend is paid out of cash or out of borrowing
Find where value leaves a company through a side door that no ratio measures
Write a one-page verdict on a company, ending in the 3 things that would tell you that you were wrong

Nothing here is a tip. Nothing here names a company to buy. Everything here should still be useful to you in 2036, and about a company that does not exist yet.

The reading order

The order is deliberate. The early lessons build the raw material, the middle lessons teach the judgement, and the last one assembles everything.

Foundations

What is fundamental analysis? — price is what you pay, value is what you get, and the gap is what you are looking for.
Economy to company: the top-down approach — judge the weather before you judge the company.
Industry and competitive analysis: the moat — 2 companies sell the same thing and only 1 makes money. Find out why.

The raw material

The annual report, and where to find the data — everything you need is published free. Know which page.
The income statement, in depth — did the company actually make money, and how much of it will happen again?
The cash flow statement, in depth — a company can report profit and still fail. Cash is where that shows up first.
The balance sheet, in depth — how strong is this company if business turns bad for 2 years?

The measurements

Profitability and efficiency ratios — how well does the company turn money and assets into profit?
Liquidity, solvency and leverage ratios — can it pay its bills this month, and survive the next 10 years?
Valuation multiples: P/E, P/B, EV/EBITDA and more — each multiple answers a different question. Using the wrong one gives a confident wrong answer.
Intrinsic value and discounted cash flow, made simple — a model is arithmetic wrapped around guesses. Run it backwards instead.
Why you cannot value a bank like a technology company — a bank's debt is its raw material. Here is the metric set that actually applies.

The judgement

Earnings quality and accounting red flags — profit is an estimate, cash is a fact. Compare 5 years of both.
Growth analysis and dividend investing — not all growth is worth owning, and a high yield is a warning more often than an offer.
Management, governance and business quality — numbers measure the past. Capital allocation decides the next decade.
Spotting a fraud: corporate red flags before they cost you — almost every large fraud was disclosed before it was discovered.

Putting it together

Full fundamental analysis of a company, end to end — 9 questions in a fixed order, ending in 1 written page and a list of what would change your mind.

The checklist

Every article ends in an action. Collected here, they are 2 or 3 afternoons of work, and they are the most valuable thing in this cluster. Tick them off on companies you already own.

Before you buy anything

Write 3 sentences: what it sells, who buys it, what they would use instead. (1, 17)
Name the family — lender, capital-heavy producer, or asset-light — and use only that family's metrics. (12)
Name the 2 or 3 outside variables that move this company's profit. (2)
Return on capital employed for 10 years, as a list not an average. (3, 8)
The 5-year cash test: cumulative net profit against cumulative cash from operations. (6, 13)
Reverse the valuation: implied growth = your required return − the free cash flow yield. Say it out loud. (11)
Write 3 conditions that would change your mind, and a review date. (17)

Every quarter, on what you hold

Promoter or insider pledge percentage, and whether it rose. (15, 16)
Auditor changes — resignation mid-term is the loudest free signal there is. (4, 13, 16)
Receivable days: receivables ÷ revenue × 365, against last year. (5, 13)
Interest income ÷ cash balance, against deposit rates in that country. (16)
For a bank: net interest margin, gross NPA, net NPA, provision coverage, capital adequacy, against 2 peers. (12)
Dividend paid ÷ free cash flow, not dividend ÷ profit. (14)

Once a year, on what you hold

Read the related-party transactions note in full. Find loans given, guarantees given and royalties. (15)
Read the auditor's fee table. Compare non-audit fees with audit fees. (15)
Read the key audit matters. That is a free list of the riskiest estimates in the accounts. (4, 13)
Split revenue growth into volume, price, mix and acquisitions. (14)
Compare actual growth with the sustainable growth rate — return on equity × the proportion of profit retained. (14)
Contingent liabilities and guarantees given, from the notes. (7, 9)
Open the annual report from 5 years ago and mark management's promises against what happened. (15)
Reread your own one-page verdict and check it against the 3 conditions you wrote. (17)

Habits that cost nothing

Use consolidated statements, never standalone, for any group. (4, 10)
Match the halves: enterprise value with numbers before interest, price with numbers after interest. (10)
Never compare a multiple across industries, or against the index. (10)
Count red flags, do not weigh them. Three at once means a smaller position. (16)
Vote on related-party resolutions. In India the related parties cannot vote, so the minority decides. (15)

India and the United States, equally

Every article covers both markets at the same depth, and then says where the 2 differ and what that difference tells you.

That third section matters more in this cluster than in any other, because most fundamental analysis material reaching Indian readers was written for American conditions. Promoter control changes what governance analysis means. Indian banks report gross and net non-performing assets in a standard format that US banks do not. EV/EBITDA is a weaker tool in India, where there is no reported EBITDA line and related-party complexity blurs the boundary of the enterprise. US companies disclose far more segment detail. Buybacks have historically changed US per-share figures far more than Indian ones.

None of those is a small adjustment. Copied without translation, each one produces a wrong answer with a confident number attached.

Where to start, and where to finish

If you have read clusters 08 and 09, start at article 10. If you have not, start at article 1.

Either way, finish at article 17. It is the one that assembles all of this into a sequence of questions with an order, and it ends in a page you write yourself about a company you actually own. Everything before it is a component. That article is the machine.

A note on what this is not

These lessons are free and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now.

Nothing here is advice to buy or sell anything. Every case named is a real, resolved event, described so that you can recognise the shape of it next time. The goal is the same one it has always been: fewer people in the 95%.